Let’s try it with a coin toss, a $1 bet, and a one-for-one (1:1) payoff:
Investors use a similar technique to evaluate their investments. The difference between the two is the expected value.ĮV = (Payoff x Probability of Winning) - (Bet x Probability of Losing)Ī positive and negative EV tells the gambler that the bet is good or bad. This risk-reward evaluation is quantified by expected value (EV), which weighs the bet by the probability-of-losing and the payoff by the probability-of-winning.
Whenever someone makes a wager, he is evaluating the risk of losing against the reward of winning. This section describes some of the mathematical and statistical ideas that are part of the game.
